Food costs on rise, says British supermarket giant’s chief

LONDON – The chief executive of Tesco, the British multinational grocery and general merchandise retailer, could be forgiven for being less than delighted to see me. For the last few months I have been Philip Clarke’s baiter-in-chief. It’s not just that I have been shamelessly promoting a book about food security, which fingers supermarkets as one of the key culprits in a British farming crisis that has dangerously undermined our self-sufficiency. I have also clashed repeatedly with Clarke’s spokespeople over Tesco initiatives to help people waste less food or eat more healthily.

I kept pointing out how flimsy the initiatives seemed, how they were too focused on influencing consumer action rather than the retailer sorting out its own practices. After the second bruising encounter, Tesco asked whether I would like a quiet off-the-record chat with Clarke. I declined. Instead I suggested the sort of on-the-record interview Tesco chief execs do not do. To my surprise he said yes. “That is why we’re here,” he agrees, when we meet in the company’s St. James’s boardroom.

Clarke is already having a less than perfect week. A few days ago Tesco was forced to acknowledge that he had lost his driving licence after speeding offences in his Jaguar. “Phil regrets this matter and accepts the decision to suspend his licence,” a terse statement read. And no, thank you, he wouldn’t be discussing it further.

Then again, put against the events of 2013 so far it’s really no biggie; a chauffeur comes with the £1.1 million salary. A lost driving licence is nothing compared to a slump in pre-tax group profits of 51.5 percent or having to announce that, among other things, they are pulling out of a failed retailing venture in the U.S. at a cost of billions. And both of those pale into insignificance against the U.K.’s horsemeat scandal (where foods advertised as containing beef were found to contain undeclared horsemeat) of January and February which arguably did more damage to Tesco — four of their products were involved — than any other major retailer. In what feels like the nearest thing to a heart-searching interview as a chief executive is ever going to get, Clarke is ready to acknowledge the damage to the brand. After all, they’ve done the research. “It became clear that people thought Tesco was big and Tesco was bad,” he says, a little glumly. He sounds personally wounded when he says, “after 39 years in the business it surprised me.”

It’s not what you expect of a Tesco big beast. The retailer, which has a worldwide turnover of nearly £75 billion, has long been famed for its hardnosed approach. Under former chief executive Sir Terry Leahy, who stepped down in 2011, it was all about high growth and big bargains, rather than cuddly notions of customer care or reputation. In those days journalists’ inquiries were generally met with a terse “no comment”. Tesco felt no need to engage. Clarke may have things in common with Leahy. Both had modest beginnings in Liverpool, north-west England, and worked their way up through the business. Both now live in the same village in Hertfordshire, south-east England, where Clarke, a married father of two grown-up children, likes to relax by horse riding. But where Leahy was chief exec as lean, charismatic rock star, Clarke is more the country grocer: comfortably upholstered, soft spoken, ruminative.

Certainly he seems in soul-baring mode. “We were hearing that Tesco has got to put in more [to society] because people think that all we do is take out,” he says. He points to a new “core purpose” recently added to the list on the boardroom wall: “We use our scale for good.” Really? Tesco wants to do more than just make dollops of cash? Yes, he says. He seems genuinely hurt that Tesco’s post-horsemeat PR offensive — it ran full-page newspaper ads announcing it was “changing” — had been met with suspicion.

Was he really surprised that people saw all that as little more than an attempt at reputation management? He admits it’s understandable. “People’s memories tend to be dominated by certain events.” Does he also understand that they are seen as failed custodians of the food supply chain? “Yes, of course. When you have 30 percent of the retail trade it comes with responsibilities. And I bitterly regret that four of our products were laced with horsemeat.” He admits that at the time he simply didn’t believe it. “I thought: ‘This is impossible. We use the best suppliers. We take the most extraordinary pride in the food that we put on people’s plates.’ “

In the years preceding the horsemeat scandal, numerous suppliers had told me that the deals being forced on them by the big supermarkets were so brutal financially that something had to give. Contracts had been too short. Margins too tight. Farmers didn’t have a guaranteed price. Contracts would be broken at the last minute. Huge numbers had simply quit farming as a result and our food self-sufficiency had slumped from a peak of more than 70 percent in the early 1990s to nearer 50 percent now.

In February, Clarke gave a remarkable speech promising a new relationship with British farmers. I suggest to him that the speech to the National Farmers’ Union (NFU) indicated he thought that relationship had been unequal. “I pretty much said it,” he agrees. “I chose my words carefully. I needed to acknowledge what our customers had been saying to us.” Which is? “We think you take out too much, we think you’re too hard.” A new poll for the Prince’s Countryside Fund (a non-profit organisation associated with Prince Charles, Prince of Wales), before the U.K.’s National Countryside week, which began July 22, backs that up. Over 80 percent of those polled believed it is important to buy British produce to support British farmers.

So are they going to do that? He says yes. “We’ve got to produce more food at home and we’ve got to make more and better deals with the producers.” He says it means longer contracts allowing farmers to invest, and dealing with them directly rather than through middlemen. During his NFU speech he denied this re-engineered relationship with producers would inevitably mean that “food needs to become more expensive.” Surely he was being disingenuous? Isn’t the 10 percent of income we in the U.K. spend on food (it’s around 12 percent in the rest of the European Union) too low? I know he understands the global context, the way the rise of the middle classes in China, India and elsewhere has led to a huge demand for food we thought was ours by right. He has more experience in the 13 countries in which Tesco trades than most of his board. He nods. “There was a time when we could go to South Africa to buy fruit and be the only retailer there. Not any more.”

Which means food prices must rise? We are on sensitive territory here. Supermarket bosses run scared of talking about such things for fear of driving customers to the opposition and damaging share value. Only Mark Price, boss of British supermarket Waitrose whose affluent customers are less price-sensitive, has broken ranks to admit such inflation is inevitable. At first Clarke hedges his bets. “It’s good that we can get good quality food at a good price, isn’t it?” But that price is going to go up, I say, again. He hesitates. “I’m thinking.”

He stares away out of the window in silence. Then he says: “Because of growing global demand, it is going to change. There’s going to be more demand and more pressure. Over the long term I think food prices and peoples’ proportion of income may well be going up but we’ll be doing our bit. Unless more food is produced prices must go up. It’s the basic law of supply and demand.” It feels like a moment of confession. The boss of Tesco has finally said the unsayable.

Peter Kendall, president of the NFU, acknowledges that Clarke’s heart is in the right place. He also says that Tesco has already done good things, especially in paying dairy farmers more for milk. “But I think the company is an unwieldy tanker to turn around. How does he convince the whole of Tesco?” Others in the food industry make the same point, with one senior executive describing Tesco’s buyers to me as “hardnosed” and “aggressive” people whose basic starting point is that all suppliers “are liars.” Clarke accepts that in an organisation like his there may be people like that, but insists that cultures do change. “It starts with the leadership. For years we’ve been working hard with our buyers and we continue to do so.” That also means getting them to understand that price isn’t everything. “They need to manage their categories in a more rounded way.”

Does he worry that some of Tesco’s fanfared initiatives to get people to waste less food and eat more healthily were thin on detail? “They did lack detail. But sometimes it’s great to have an ambition and then work out how to achieve it.” He promises there will be terrific announcements to come. I say we will have to take his word for it. What, though, about all the emphasis on what consumers can do to cut down on waste? Where were the announcements on what Tesco would do to cut down on waste in its supply chain? Over-ordered crops have ended up being ploughed back into the fields when Tesco suddenly decided it didn’t need them. “There will have to be an end to that,” Clarke says simply. They will, he says, have to be better at forecasting their needs. And where they have ordered too much they will have to take responsibility “for selling them on the open market for a lower price than we contracted to pay.”

What about buy one get one free deals which are seen as responsible for people buying more than they need? “Customers don’t like them as much they used to,” Clarke says. “They’d prefer to get a cheaper product than get one for free.” And the deals and buy one get one free offers on unhealthy foods? “I have a responsibility to give customers choice. But we were the first supermarket to move confectionery away from the tills.”

Our time is up. We head around the corner to a Tesco store on central London’s Regent Street for photographs. Suddenly he is retailer-in-chief. He wants me to see the takeaway salad bar which, he says, is a “huge hit,” talks enthusiastically about the individually wrapped sushi, which is his own lunch of choice, a hangover from his days working for Tesco in Japan. As I herd him up the aisles towards the photographer, he keeps stopping to point out the great value of a BLT sandwich here, a chicken sandwich there. And that’s the point. Supermarkets are price-sensitive businesses. Can Clarke really deliver a change in the way Tesco deals with its farmers, given those massive pressures? We have to hope so. In the long term, access to affordable food depends upon it.